Retirement, Smart Spending

Retirement Planning For The Young(ish)

Now, young in the retirement planning world is a lot different than the real world, maybe even more so in this economy. And, of course retirement planning for a “young” person with three kids and a mortgage is different than a “young” person who is single and renting. For the purposes of this post though, those types of differences are going to be put aside to get to a larger point. Additionally, the word “young” is going to be used for nearly anyone who has at least 20 years to go until retirement. So, while a baseball or football player may be too old at 38, in the investment world they are still considered “young”.

There is much confusion about retirement planning in general, and that may be especially true with younger people. Some of that of course, just stems from being green and some of it is from a lack of interest. Naturally, those companies selling retirement planning advice have zero incentive to make it seem easy as pie. And, the truth is every person’s situation is indeed at least a bit different. But there is another truth as well and that is those differences mean almost nothing for new investors. Oh, sure, you could be one of the few that has a complicated financial situation that needs extra attention, but in most cases that means you already have much more money than the average person. For everyone else the solution is simple: buy stocks.

That’s it. It is no more complicated than that. Now, I hope it is obvious that that does not mean one should take their life’s savings and plunk it down on a random robotics company. It means buy stocks, as in plural and buy over time. The easiest way to do that is through a mutual fund, but if you are one of those that likes a hands-on approach then there is certainly nothing wrong with a basket of individual companies. The rest of your “portfolio” should be cash. After you figure out a comfortable amount of cash on hand for emergencies, such as home repairs, loss of a job, etc. then the rest should be invested in stocks. The reason for this is that stocks keep up with inflation over time and even offer the opportunity for growth well above that. For example, if a company makes shampoo and the ingredients used to make that shampoo rise, then they simply pass those costs to the consumer. And that is true with all companies as they are forced to either make a profit or go bankrupt.

As stocks go down, and they will, buy more. In fact, if you are young then mathematically you want stocks to go down. In a perfect world, you would buy some stocks every month (or quarter or year) and the value would go down. Then, five years or so before your retirement stocks would turn around and go on the biggest bull market run of all time. Of course, that will not happen and it may be just as well. Human nature being what it is, it would take someone with a strong constitution indeed to keep investing year after year after year while continually losing money. Still, it is important to keep in mind that the idea of buying stocks is to make money closer to the end of one’s work life than the beginning. It can be helpful to consider bear markets as “bargains” rather than lost money.

And that is all there is to it. There are items such as what vehicle to start with such as a 401k (almost always yes), but the important thing is to invest in assets that can go up over time. Now, real estate, fine art or even comic books will all, more than likely offer protection against inflation. But, nothing is as easy as investing in an old-fashioned stock mutual fund. You can start slowly and invest in regular increments, or just whenever you have extra cash. Plus, over time, many companies far exceed the goals of keeping up with inflation. Yes, fine art, baseball card etc. have rarity as they aren’t making any more Picassos or Babe Ruth cards, but that also requires an effort to protect those investments and store them. One last caveat: if our debt (and other policies currently being practiced) pushes inflation so high as to ruin the dollar completely, then of course, no investment will be great and gold and silver will be king. That is an extreme that I wouldn’t normally even mention, but we are not in normal times. Assuming that the dollar is not down in flames and that the necessities like food are still available, then investing in assets will be a great long term hedge against inflation.

In short, for convenience as well as efficacy, nothing beats the stock market over a long period of time. If you have that time buy stocks if possible. All the other “retirement planning” nuances are, for the most part, ignorable. Once your portfolio grows in size, then start worrying about the more complicated stuff. Good luck! I’ll be writing about this topic all month. Up next I’ll give you a bit of guidance on how to choose a mutual fund.